The Approaching Light Before the Dawn
We cannot remember a time when we’ve seen such a widespread disparity between what is happening in the economy and what is happening in the stock market.
Let’s take a moment to briefly outline the situation using hard data.
The unemployment rate soared to a post-depression high of 14.7% in April, while the survey of businesses by the U.S. Bureau of Labor Statistics revealed a loss of 20.5 million jobs in April, the worst monthly reading since records began in 1939.
In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.
April’s 11.2% drop in industrial production, a metric the Federal Reserve has tracked since 1919 – is the biggest monthly decline on record. Furthermore, consumer spending in April fell 13.6%, the biggest decline ever recorded (U.S. BEA, data back to 1959).
Record layoffs continue, with the number of first-time claims for unemployment insurance topping 40 million over a 10-week period ending May 23 (Dept. of Labor/St. Louis Federal Reserve). Put another way, nearly one in four working Americans have experienced a job loss.
If there is any good news, it is that the number of first-time filings has been declining, and the number of individuals who file on a regular basis in order to receive jobless benefits is about half the number of first-time filings.
This would suggest that paycheck protection loans are kicking in, and reopening's are encouraging businesses to recall furloughed workers. Still, May’s employment report will likely show another rise in the jobless rate.
Let’s back up for a moment.
In April, we noted that, “In just a three-week period, the number of first-time claims for jobless benefits totaled an astounding 17 million. For perspective, during the 18-month-long 2007-2009 recession…first-time claims totaled 9.6 million.”
Yet, “The Dow Jones Industrial Average added 2,107 points over the three Thursdays the massive number of new claims were released (St. Louis Fed).”
Since then (April 9), the Dow has added 1,664 points, or 7.0% (St. Louis Federal Reserve). It is up 36.5% since its near-term March 23 bottom.
The broader-based S&P 500 Index eclipsed 3,000 by the end of May and has rebounded 36.1% (St. Louis Federal Reserve) from its March 23 low.
Meanwhile the tech-heavy NASDAQ Composite has added 38.3%, is back above 9,000, and is nearing its all-time high (Yahoo Finance).
Simply put, economic activity is falling with depression-like speed, but the major averages are in the midst of an impressive rally.
Here’s one more piece of performance data.
During the financial crisis, the S&P 500 Index lost nearly 57% from its October 2007 peak to the bottom in March 2009 (St. Louis Federal Reserve). This year, in about one month, the S&P 500 Index shed 34% before hitting a near-term bottom on March 23.
The adage “stocks climb a wall of worry” has never been more appropriate amid economic devastation and an outlook that remains incredibly murky.
A closer look at the Wall Street/Main Street disconnect
A combination of factors has fueled the rally since late March.
The response by the Federal Reserve has far outpaced its 2008 response, which has lent a tremendous amount of support to stocks. The same can be said of government fiscal stimulus.
Investors are also keeping close tabs on state re-openings, which will reemploy furloughed workers, help stabilize the economy, and set the stage for a possible economic rebound later in the summer. Talk of vaccines has also helped.
You see, investors don’t simply look at today’s data, which in many cases is backward-looking. Instead, they are forward-looking as they attempt to price in economic activity, the level of interest rates, corporate profits, and more over the next 6-12 months.
An approaching dawn
If we look at what is called “high-frequency economic data” (daily or weekly reports), we are beginning to see signs of stability.
Daily gasoline usage has rebounded (Energy Information Administration), daily travel through TSA checkpoints is up (TSA), hotel occupancy is off the bottom, and the same can be said of weekly box office receipts (Box Office Mojo).
In addition, the weekly U.S. MBA’s Purchase Index (home loan applications) registered its fifth-best reading over the last year (as of May 22, U.S. Mortgage Bankers’ Association/Investing.com), suggesting that low interest rates and some confidence that the U.S. economy is set to recover are lending support to housing.
Of course, these are highly unconventional measures of economic activity and are industry-specific. Outside the Purchase Index, each remains well below previous highs, but the turnaround suggests we may be seeing some light at the end of a very dark tunnel.
Any given level of a major stock market index represents the collective wisdom of tens of millions of stock market investors. It is not simply an opinion, but an opinion with money behind it.
When stocks were in a free fall in March, investors were anticipating a devastating blow to the economy. Tragically, the data did not disappoint.
Has the rally been too much, too quickly?
Even in the best of times, economic forecasting can be difficult. Today, the outlook is clouded with a much greater degree of uncertainty.
- Will the virus lay down over the summer?
- How will reopening's proceed?
- How quickly can a readily available vaccine and treatment be developed?
- What might happen to COVID-19 next fall and winter?
- How quickly will consumers venture back in public and resume prior spending patterns?
These are difficult questions to answer.
Don’t expect a return to a pre-COVID jobless rate anytime soon. But investors are betting that an economic bottom is in sight.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA*
MSCI Emerging Markets*
Bloomberg Barclays US
Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD returns: April 30, 2020-May 29, 2020
YTD returns: Dec 31, 2019-May 29, 2020
*in US dollars
We understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis, not to mention recent civil unrest. It’s a combination none of us have ever faced.
We have addressed various issues with you, but we have an open-door policy.
If you have questions or concerns, let’s have a conversation. That’s what we are here for.
Vincent Serratore & Katherine Horgan